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Momentum effect in individual stocks and heterogeneous beliefs among fundamentalists

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  • Sandrine Jacob Leal
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    Abstract

    This paper investigates whether the observed “momentum effect” in individual stocks, caused by positive serial correlations in returns over short horizons, can be explained by fundamentalists’ heterogeneous beliefs when chartists are present in the market. For this purpose, we propose a heterogeneous agent model wherein agents follow different strategies and where information about asset fundamentals diffuses slowly. Computer-based simulations reveal that the interplay of fundamentalists and chartists can robustly generate positive serial correlations in returns over short horizons. Especially, short-term momentum is explained by trend-following strategies and slow diffusion of information. Furthermore, our model is able to simultaneously generate the momentum effect in individual stock returns, asset price overreaction and misalignments often observed in real financial time series.

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    File URL: http://cerefige.univ-lorraine.fr/sites/cerefige.univ-lorraine.fr/files/users/12-03_cahier_recherche_leal.pdf
    File Function: First version, 2012
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    Bibliographic Info

    Paper provided by CEREFIGE (Centre Europeen de Recherche en Economie Financiere et Gestion des Entreprises), Universite de Lorraine in its series Cahiers du CEREFIGE with number 1203.

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    Length: 16 pages
    Date of creation: 2012
    Date of revision: 2012
    Handle: RePEc:fie:wpaper:1203

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    Related research

    Keywords: momentum effect; return predictability; bounded rationality; trading strategies; computer-based simulations;

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